The new Inland Revenue tax proposals
SSASs and SIPPs after ‘A-Day’
I’ve been travelling around and speaking at quite a few conferences about these new tax proposals this year and one of the questions that always comes up is “What’s going to happen to SSASs then?”, or something like that. Not surprising really, given that there are 33,000 active SSAS schemes out there. SSASs aren’t exactly execution-only business either, so it’s a fair bet that advisers are being asked what’s going on by any clients who’ve got wind of this already. Perhaps that’s not too many so far, but sooner or later all of them will need to speak to someone about their options and what they should or will have to do. These new tax laws will be retrospective remember, so no-one will escape them. So what is all this new stuff going to do for these tens of thousands of small businesses? Well, on the face of it, it doesn’t look good SSAS-wise, or SIPP-wise either. But it now turns out things may not be quite as bad as we first thought. So, where does that leave us?
This is a good example of an issue that advisers and pension scheme members will need to track very carefully as it goes through the consultation process. It will need us to keep a very close watch on it I think. But, before I get ahead of myself, perhaps a look at the original pronouncements in the IR consultation paper and a bit of the thinking behind the statements made there will set the scene.
One of the big positive spins wrapped up in the new single pensions regime that is being proposed is that the eight existing tax regimes are being condensed into one. What that means in practice, though, is that the structure of all pension schemes will be the same. Including the way they are allowed to invest. The Inland Revenue paper makes it quite clear that a single set of investment requirements will apply to all pension schemes. So, either SSASs and SIPPs will need to change to be the same as other pension schemes, or other pension schemes will be changed to be the same as SSASs and SIPPs. No prizes for guessing which way that’s likely to go, or so you would have thought.
It all comes down to whether or not a pension scheme’s investments meet the ‘prudential standards’ that will be set in the new rules for all schemes. It’s not clear from what we have seen so far what these new standards will be, but the Inland Revenue paper gives us a few pretty strong clues. For a start they point directly at SSASs when they say “the prime purpose of providing retirement benefits is not always the main consideration when schemes plan their investments”. Hmm! The figures quoted (in Box B3 on page 46 of the consultation paper if you want to look it up yourself) are used in support of this claim. The Revenue’s records show that 42% of SSASs have outstanding loans to the scheme’s sponsoring employer and 39% own commercial property used by the business of the sponsoring employer. According to my calculations that means around 14,000 companies are relying on their pension funds for loans and about 13,000 companies’ pension funds own the commercial property the companies operate from. Some of them presumably do both, so at a (very) rough guess I’d say somewhere between 20,000 and 25,000 small businesses will have an acute interest in the way this round of consultation pans out. That’s a lot of companies that maybe employ something like a quarter of a million people between them (my rough and ready guess again on the basis of an average of ten employees at each company). In my book that means it’s very important that all financial advisers involved in helping companies through this keep themselves as well informed as they can as the consultation process progresses and the final rules eventually fall into place.
At the moment, as I said earlier, we just don’t know what the new rules will be. But the words used in the paper give a strong indication of the likely direction things are meant to go SSAS-wise. Again, another direct quote from page 46: “It is hard to resist the conclusion that many, perhaps most, SSASs have assets that provide only limited protection for the pensions of scheme members in the event of the failure of the sponsoring business. The way schemes are advertised confirms this: providers stress their tax efficiency not their quality as pension schemes. In other words, SSASs are not using tax breaks to help people develop secure retirement income, as they are intended.”
Well, you can pick the bones out of that the same as I can. It’s not too hard to see where this is all heading. The consultation paper does acknowledge that the new rules will affect schemes with special arrangements now, and notes that these schemes will have to adopt the new and consistent limits ‘in due course’. ‘Special arrangements’ looks like code for SSASs and SIPPs to me, but ‘in due course’? Your guess is as good as mine.
The paper ends its discussion on SSASs and SIPPs with a string of questions aimed at those choosing to respond to the consultation. This is what it does with nearly every section. There are more questions in the paper than you’d get in the average multiple-choice exam. It’s the modern way of things.
The main questions are around what restrictions should apply to loans to employers, loans to scheme members, and commercial property transactions with the sponsoring employer. They also ask if there are any features of SSASs and SIPPs which should be considered for all pension schemes. Answers on a postcard please, to arrive at the Inland Revenue or the Treasury by 11 April. And, basically, that’s where we thought we were until some of us started talking to officials at the Revenue. And this is where it gets interesting.
At a seminar, reported in the press a couple of weeks ago, a senior Revenue official talking about SSASs and SIPPs said that they had ‘no intention of banning investment in commercial property’. Which, quite frankly, was a bit of a bombshell given all that I thought I’d understood from reading the consultation paper. The newspaper reporting this called the statement a ‘U-turn’. So I thought I’d better follow this up and see if I could get to the bottom of it. After all, it is pretty important to a lot of people.
I managed to catch up with some Revenue guys at another seminar last week and the upshot is I now think the outcome will be that existing schemes will be allowed to remain invested in commercial property and even that new schemes will be able to invest in commercial property in the future. But don’t ask me what the process will be, or what the exact rules that will apply will be either. It’s probably fair to say that nobody knows at this stage. All in all, though, it looks as if the doom and gloom that settled on SSASs and SIPPs when the consultation paper was published has lifted a bit. But we do have to keep watching it to see what actually happens.
At this stage, I would say I am hopeful that changes to commercial property investments for SSASs and SIPPs will not be required, but that loans are probably on their way out. But to be honest, I don’t really see how SSASs and SIPPs can be treated differently to other pension arrangements if we’re going to have only one tax regime applying to all, so I’m still struggling to understand some of this. And that’s the important point really. Until we actually see the full and final set of rules and regulations when they are eventually published, we won’t know for sure where we are or what we should be saying to people.
In summary, what we know so far is:
- All pension schemes will have to meet the same ‘prudential standards’ after ‘A-Day’, but we don’t know what the ‘prudential standards’ are yet.
- ‘A-Day’ is some time in the future when all these rules will come into force, but we don’t know when ‘A-Day’ will be.
- Schemes that find their investments are outside of the scope of those allowed by the new rules will have to bring their investments in line with them, but it looks like commercial property investments will still be OK.
- A transition period will be allowed for this, but no-one knows yet how long that will be or when it will start.
Not much to go on so far for such an important issue for so many small businesses I agree. I’ll be keeping a pretty close eye on all of this as it develops in the coming months and as soon as I find out anything I’ll let you know right here in the BeeLines. Keep dropping in from time to time if you want to track how things are panning out on this and other pensions topics.
27 February 2003
This document is based on Scottish Life’s understanding of the current tax law and the Inland Revenue’s proposals and the Pensions Green Paper issued on 17 December 2002. These proposals are subject to consultation and may change in the future.